When my husband and I opened a registered education savings plan (RESP) account for our first son, it seemed straightforward.
When we were able to, we deposited money into the account. We understood the basics – that we could make as much as $2,500 in RESP contributions a year and receive a matching 20-per-cent grant from the federal government. We’re talking $500 a year in free money.
When our second son arrived, we switched to a family RESP plan, where multiple children in a family are named as beneficiaries. The advantage of a family plan, we thought, is that if one of our sons doesn’t end up going to university or college, his brother can use the money in the family plan.
What seemed like a no-brainer got complicated – fast. Every time we deposited money into our family RESP, there was confusion from our financial institution’s end on how to do this. Because we have a family plan, we did not think we had to designate any of the money we deposited toward a specific son – which we later found out was necessary.
Two years later, I have been told that unbeknownst to us, all of the money we have deposited in the last two years has arbitrarily been put in my younger son’s name, leaving my older son with very little. I now have to meet with my financial institution to try to sort out the mess.
Confusion about how RESPs work is one reason why more people don’t have them, says Mike Holman, the author of The RESP Book and the Money Smarts blog. A lack of funds, he says, is another.
“RESPs are more complicated than RRSPs and TFSAs and they are harder to understand,” he says. “They have been around since 1998, but have taken some time to gain traction.”
The main advantage of family versus individual RESP is to save on annual fees and avoid duplication in paperwork, Mr. Holman says. However, it is possible to share money between siblings who have individual accounts, so you don’t actually need a family plan in order to do that.
As we have discovered, parents with family accounts do need to designate which child the money goes towards, because the government has to track contributions and withdrawals for each child in order to ensure they get the proper grant amount and the correct tax receipts.
“It is easier to think that a family account is just one big container and it all gets mixed together, but that is not the case,” Mr. Holman says. Most financial institutions have a default where they will divide the contributions equally between the children. You have the option to allocate every contribution to any one beneficiary or combination of beneficiaries.
Despite all the hassles that accompany RESPS, Mr. Holman maintains that for parents who can afford it, they are they best way to save money for a child’s education. He gave us this eight-step process on how to go about setting up an RESP account:
Step 1: Make sure the child is eligible for RESP grants. To be eligible, your child must be a Canadian resident. Also, the account should be started before the end of the year in which the child turns 15 years of age. The eligibility requirements for 16- and 17-year-olds is complicated.
Step 2: Make sure your finances are not a disaster. There is no point in saving for your child’s college education if you can’t afford to feed or clothe them. If you run into financial trouble and have to unwind RESP account early, there are big penalties.
Step 3: Decide between pooled/group/scholarship RESP plans or a self-directed RESP plan. Pooled RESP plans – where a salesperson will come to your house and help you fill out the forms, and the investments are managed for you – are more restrictive and have limitations around the contribution and withdrawal schedules. Self-directed plans – available from a financial adviser or bank – are a lot more flexible. As the “self-directed” name suggests, the parent controls the investment choices but the bank or financial adviser will weigh in on how to set up the investments.
Step 4 – Get your child a social insurance number (SIN).
Step 5 – Should you go with a family or an individual plan? An individual RESP plan has one beneficiary while a family plan can have multiple beneficiaries. If you have one child, then an individual plan is the obvious choice. For multiple-child families, the family plan is often more convenient and sometimes cheaper. However there are drawbacks to family plans as well: It’s difficult to keep track of contributions by beneficiary and the withdrawal scenarios are more complicated.
Step 6 – Set up the RESP account. This can be done through your financial adviser, a discount brokerage account, or your local bank. When you fill out the paperwork for the account, it is important to apply for ALL the different grants, including the lower-income ones. Even if you don’t qualify for all the grants now, it’s possible that you will have some lower-income years in the future and those grants will be paid automatically if you have applied in the past.
Step 7 – Calculate how much you can contribute. To get the maximum annual grant per child, you should contribute $2,500 a year or $208.33 each month. This can be doubled if you have unused contribution room. Most people with young kids might be better off starting with a smaller monthly amount, say $50 and increasing it with time. Every little bit counts, especially if you start early.
Step 8 – Start contributing. Normally you would start the RESP account with an initial contribution, but some institutions will allow you to set up a monthly preauthorized transfer in lieu of an initial deposit. At this point you don’t have to do anything, except continue with your contributions.